Is McPherson’s Limited (ASX:MCP) Undervalued After Accounting For Its Future Growth?

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Looking at McPherson’s Limited’s (ASX:MCP) fundamentals some investors are wondering if its last closing price of A$1.205 represents a good value for money for this high growth stock. Let’s look into this by assessing MCP’s expected growth over the next few years.

Check out our latest analysis for McPherson’s

Where’s the growth?

McPherson’s’s growth potential is very attractive. The consensus forecast from 4 analysts is extremely bullish with earnings per share estimated to rise from today’s level of A$0.103 to A$0.177 over the next three years. On average, this leads to a growth rate of 15% each year, which signals a market-beating outlook in the upcoming years.

Can MCP’s share price be justified by its earnings growth?

Stocks like McPherson’s, with a price-to-earnings (P/E) ratio of 11.67x, always catch the eye of investors on the hunt for a bargain. In isolation, this metric can be a bit too simplistic but in comparison to benchmarks, it tells us that MCP is undervalued relative to the current AU market average of 15.89x , and overvalued based on current earnings compared to the Consumer Durables industry average of 10.78x .

ASX:MCP Price Estimation Relative to Market, June 27th 2019
ASX:MCP Price Estimation Relative to Market, June 27th 2019

After looking at MCP’s value based on current earnings, we can see it seems overvalued relative to other companies in the industry. However, to properly examine the value of a high-growth stock such as McPherson’s, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 11.67x and expected year-on-year earnings growth of 15% give McPherson’s a very low PEG ratio of 0.76x. This means that, when we account for McPherson’s’s growth, the stock can be viewed as relatively cheap , based on the fundamentals.

What this means for you:

MCP’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Financial Health: Are MCP’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has MCP been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of MCP’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.